The oil market and its main drivers in 2018. Alexander Sivtsov.
In 2018, the oil market remained positive, while in December 2017, Brent and WTI oil prices rose by about $ 10 on average, updating the maximum values since December 2014.
Now let’s look at the main factors that influence the formation of oil prices in 2018.
Fig. 1 Chart of the Brent brand from December 2014 to April 2018
Fig. 2 Chart of the WTI brand from December 2014 to April 2018
The oil market: OPEC pact +
The main support for the oil market was provided by the observance of the OPEC + pact, according to which oil production should decrease by 1.8 million barrels per day, of which OPEC falls 1.2 million barrels per day, Russia 300 thousand barrels per day day and another 300 thousand for 10 countries outside the cartel.
- According to the IEA’s latest report, in March, OPEC quotas were cut by 161% or 1.932 million barrels per day, which exceeds the OPEC + quota of 1.8 million barrels per day.
Russia was not so conscientious and fulfilled its obligations by 82%. It should be noted that compliance with the OPEC + pact by 161% on the part of the cartel was mainly achieved by reducing production in Angola, Venezuela, Algeria and Saudi Arabia.
As for the OPEC countries that exceed the plan to reduce oil production, Venezuela is set to allocate, where oil production continues to decline rapidly due to the inflamed financial crisis. The OPEC + pact was concluded in November 2016, while oil production in Venezuela was at the level of 2.4 million barrels per day. In March 2018, production in Venezuela fell to 1.488 million barrels per day, or by 912,000 barrels per day, which is 47% of the total reduction in the volume of cartel production in March. A simple calculation shows that not all OPEC members comply with quotas by 100%, as at the same time the reduction in production within the cartel in March would exceed 2.1 million barrels, which is quite possible in the future.
Oil market: Geopolitical instability
Another factor that supports the oil market in 2018 is geopolitical tensions in the Middle East. The Middle East is the center of world oil exports and supply disruptions from this region will sharply reduce supply in the market, which will support further growth of oil prices. On April 11, Saudi Arabia intercepted ballistic missiles launched by rebels in Yemen, believed to support Iran. Iran’s actions could threaten the country with new sanctions from the US, which could affect the supply of oil from the country, which will also support the further rise in oil prices.
Oil market: US oil production growth
Almost every day on various Internet resources there is information that the growth of oil production in the US continues to grow, which should neutralize the effect of the OPEC + pact and increase the supply of raw materials in the market, thereby exerting pressure on prices, but the picture, which we see is not at all like that.
- According to the IEA report, oil production in the US in March rose to 14.41 million barrels, while in 2017 oil production was at 13.19 million barrels per day and this growth is far from the limit.
In general, the growth in oil production in the US was achieved through the development of shale deposits. In turn, it remains an open question why the increase in oil production in the US practically does not put pressure on the oil market, there are 3 main reasons:
- Demand for shale oil is not so great, since most refineries in the world can not work with it, which requires their refurbishment.
- At the output of shale oil, finished products are less than from other varieties. The price of shale oil is lower than its competitors, but this can not compensate in a short time the costs of refurbishing factories.
- Delivery of oil from the USA overseas. It is impossible to build a pipeline from America to Europe or Asia, for which the delivery of oil should be done with the help of tankers. This increases the cost of its transportation and makes it even more unprofitable for use in Europe or Asia.
It can be noted that the rise in oil prices could continue in 2018, as the number of factors supporting the growth of oil prices is greater than the factors that exert pressure.
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